Why Analysts Are Looking at Valeant Pharma Differently After Earnings

Valeant Pharmaceuticals International Inc. (VRX) saw its shares hit a multiyear low this past week. There was hope for a turnaround when Joe Papa took over as chief executive officer, but it seems that little has gone his way, especially after the company reported earnings early this week. Some analysts took this opportunity to reevaluate their stance on the stock. Although this might be a buy for some, the returns look to be getting smaller.

The company said that it had $1.26 in earnings per share (EPS) and $2.4 billion in revenue. The consensus estimates from Thomson Reuters had called for $1.21 in EPS and revenue of $2.34 billion. The same period of last year reportedly had EPS of $2.50 on $2.79 billion in revenue.

The decrease in revenues for the quarter was primarily driven by a reduction in product sales from the existing business of $310 million and the negative impact of foreign currency exchange of $43 million. Revenues in the quarter were further affected by a drop in realized pricing by 3%, along with divestitures and discontinuations of $16 million.

In terms of guidance for the 2017 full year, the company expects to see revenues in the range of $8.90 billion to $9.10 billion with an adjusted EBITDA between $3.55 billion and $3.70 billion. The consensus estimates are $4.76 in EPS and $8.97 billion in revenue for the full year.

Mgt’s rev outlook ($8.9-9.1B) bracketed consensus. However, adj EBITDA is expected to be in the range of $3.55-3.70B (vs $3.88B consensus) as Valeant plans to further invest in its R&D pipeline and step up promotion to drive longer term value for its key GI franchises (40% increase in reps). As such, adj EBITDA margin should dip to 40.3% (midpoint of guidance) vs 45.7% in FY16. Mgt appears to be of the view that the loss of exclusivities (LOEs) on drugs such as Solodyn and Acanya can be offset by new launches (Siliq, Vyzulta, etc.) with the implication that FY17 could be a “trough” year prior to the potential re-emergence of growth in FY18 and beyond. We cut our FY17 & FY18 rev & EPS estimates to $8.92B & $3.88 and $8.88B & $4.17 (vs $9.08B & $4.95 and $9.12B & $5.37).